Statutory Demands - what you need to know

Are your clients paying within terms? Are slow or non-paying clients hurting your cash-flow? Don’t want the time and expense of costly litigation?

As long as there is no dispute as to the actual debt, then Statutory Demands may assist in remedying your cash-flow issues, and can potentially resolve these issues within 21 days.

What is a statutory demand?

A statutory demand is a formal demand for a debt by a creditor on its debtor.  Failure by the debtor to pay the debt, satisfy or secure it to the creditor’s satisfaction, or take the appropriate steps to challenge the debt, will create a presumption that the debtor is insolvent (on an inability to pay basis).  This exposes the debtor to the risk that insolvency proceedings will be commenced by the creditor.

A Statutory Demand is not issued at court before being served on the debtor.  It is wise to have an experienced legal team draft the Statutory Demand for you, as any mistakes in it will have the debtors‘ solicitor or the Court dismiss it.  Potentially your company will then be liable for the debtors’ costs.

Prior to issuing a Statutory Demand, it is best practise to issue a demand letter on the debtor (in addition to invoices etc), demanding the entire sum due at that time.

The form and content of a statutory demand

The Statutory Demand must contain all of the following information:

  • When the debtor is an individual, the debtor should owe the creditor more than £5,000 and it is important the debt is not disputed.
  • When the debtor is a company the debt should be at a minimum of £750. Once again the debt cannot be disputed, if it is you will have to commence Court proceedings in the normal way or settle the debt.
  • The Demand must state how the debt arose – e.g. a lease.
  • The debtor has only 21 days to pay the debt or make an arrangement for payment to your satisfaction.
  • The Demand must be signed a person who is authorised by the creditor to do so.
  • A creditor can only claim an amount up to the date of the demand.
Disputed debts and setting aside

A debtor may challenge a statutory demand if they say the debt is disputed and is not owing.  Alternatively, let’s say you say the debtor owes your company £100,000, but the debtor says I owe you £50,000 as the other £50,000 of product/services your company provided to it was faulty and the debtor returned it to you. You would receive the £50,000 by way of an agreement (as it not disputed), but the disputed part would need to be negotiated/litigated.

Also, after receiving the Statutory Demand, the debtor may write to you and claim a product sold by you to it was defective and that the issue has been previously raised with you; therefore this is a genuine dispute and Statutory Demands should not be used.  In this case the matter should be negotiated/litigated.

If it is the case that the debtor only disputes the debt for the first time then you bring your Statutory Demand. It is still fine to serve it.  A good example would be where a tenant under a written lease is to pay the sum of £2,000 on 1 January, 1 February and 1 March but has not paid.  Even if the tenant says that there was a leaky roof for example, all leases (at least they should) will have a clause stating regardless of any breach of the lease by the landlord, nevertheless the tenant must pay the rent. As such this cannot be disputed.

Corporate debtor

Within the 21 day period, once served, a  debtor can negotiate with a creditor to voluntarily withdraw the statutory demand, on the basis that a deed is entered into and installments or are a lump sum payment are agreed to pay the arrears.  The great thing about a deed is that if the debtor defaults, then one only needs to address the breach of the deed and not the underlying debt itself.

If an arrangement agreeable to both parties cannot be reached, then the debtors only option is to apply to the court an injunction restraining the presentation of a winding-up petition.

Individual debtor

If an individual debtor disputes the debt, then they should take steps to have the statutory demand set aside by applying to court within 18 days from the date of service of the statutory demand.  Again the same principles apply as stated above for a corporate debtor.

The imaginative law firm

If the matter ever gets before the Court, berg will assist to hopefully prevent that.  The debtor will then have to provide evidence to the Court as to why there is a dispute.  The Court will not look into the merits or the substance of the case as that is for the County Court in the normal litigation process

Article written by Chris McDuff, Partner Insolvency, Berg.



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